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Venture capital market remains active Back  
Michael Murphy, chief executive at NCB Ventures

The Venture Capital market in Ireland has grown significantly with E208 invested by members of the IVCA in 2000 of which 75 p.c. was in technology companies. Over E231m was raised in 2000 by members of the IVCA of which 31p.c. was from banks, 30p.c. from pension funds and insurance companies, 13p.c. from corporate investors, 11p.c. from state agencies and universities and 15p.c. from other sources.

Along with the sixteen Irish based venture capital companies a number of overseas funds have recently established a direct presence in Ireland. A number of these companies have negotiated significant follow-on funding over the past 18 months and Enterprise Ireland has announced that they will be supporting a number of regional and specialist funds. In summary the supply side and infrastructural supports have never been stronger for companies seeking venture capital from professionally managed funds.

The growth on the supply side is a response to the demand for venture capital funding, which has been driven by the transformation of the economy from manufacturing into a service based economy; the emergence of an An entrepreneurial culture, and the excellent third level education infrastructure. However the investment mood has changed due to the global slowdown, particularly in the IT sector, and the difficulties in exiting from investments through public offerings on the various stock markets or trade-sales to quoted companies due to the volatility in the markets. Fund managers are dealing with this reality by focussing on the needs of their portfolio companies where additional rounds of funding will be required, and by being cautiously selective in committing to new investments.

The number of successful private placements arranged by corporate finance houses for IT companies has fallen significantly. This is due to the economic slowdown, the smaller deal sizes, and because private investors are less active than heretofore. This will in the short-term increase the direct demand from promoters for venture capital funding from the various funds.

On the positive side, as valuations fall promoters will find it easier to finance their projects. The self-denial period during which shareholders (investors and promoters) believed previous valuations were sustainable is over. Fund managers who sit on the fence too long will miss good investment opportunities in a competitive market and there is evidence that the shopping trolleys are rolling again. In this regard NCB Ventures has committed over E4m in 2001 to 5 new early stage companies in various sectors.

The recent experience in the IT sector has been a difficult one for investors and investees alike, involving write-downs for investors and precipitating downsizing initiatives in some companies. Looking forward there will be more order in the market, which should suit all participants and the experience gained may be viewed by the historians as a necessary chapter in the story of the growth of the venture capital industry in Ireland.

Arising out of the supply-demand issues and recent investment experience it is likely that fewer but higher quality projects will be funded in the future, and IT companies with secure intellectual property positions will continue to attract funding. The downturn in the IT sector has increased the attraction of the ‘old economy’ so a balanced portfolio approach may be adopted. M&A activity is increasing and the low interest environment should encourage MBO’s and MBI’s. We expect demand from following areas: high tech companies with strong intellectual property positions seeking to internationalise their businesses. These will include information and communications technology, internet, nanotechnology and biometrics companies and companies emerging from the third level sector, life sciences companies, leisure & tourism companies, and food companies in the convenience and functional foods segments.

Fund: Guinness Ireland Ulster Bank Equity Fund. The fund was established by Guinness Ireland Group, Ulster Bank, the European Investment Fund and Enterprise Ireland and is managed by NCB Ventures the venture capital arm of Ulster Bank. The fund invests in early-stage growth-oriented small and medium sized enterprises and to date has invested in 15 companies in technology and general industry sectors. The fund is a long-term investor offering long-term support to investees and has access to a wide-range of other sources of funding.

The fund has E15m available for investment over the next 12 months. Largest investment is E1.25m and range of initial investment is typically E625k E1.25m. Maximum in any one company is E2.85m. The fund is a general sector fund focused on start-up and early-stage opportunities. Te fund is currently considering 10 applications with 2 at legal completion stage.

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